DOWning NAFTA?

By Howard Mann, Senior International Legal Advisor to the International Institute for Sustainable Development
2 May 2009

On 31 March 2009 Dow AgroSciences LLC, a subsidiary of the U.S. Dow Chemical Company, initiated its NAFTA Chapter 11 arbitration against Canada due to the banning of cosmetic lawn chemicals in the province of Quebec. This is not the first case of a foreign investor challenging environmental and human health protection legislation under NAFTA. But if Dow’s full frontal assault on the right of governments to protect its citizens from potential risks wins, it may be the last before NAFTA’s Investment chapter is either torched or significantly amended.

Dow’s NAFTA claim centers on the allegation that Quebec failed to apply a strict science-based test to its ban on the lawn pesticide 2,4-D as required by NAFTA’s rules protecting foreign investors. There appears to be two grounds for this: that NAFTA’s investment chapter imposes a science-based test for new regulations; and that the Quebec government had allegedly committed to applying a science-based process which it then did not do.

Dow’s claim fails to address the fact that the Quebec ban is not alone in Canada. Indeed, at the time of adoption of the provincial measure, there were almost 50 municipals laws in the province banning cosmetic pesticide use. Today, there are over 100. Municipalities in other provinces have followed suit, as have other provincial governments.

Dow’s claim also fails to note that the Supreme Court of Canada (SCC) had issued a judgment in 2001 holding that these municipal bans on cosmetic pesticides were constitutional and legal. Moreover, the SCC stated expressly that they were in keeping with the right of governments to take preventive action under the internationally recognized “precautionary principle”.*

So why are none of these other measures being challenged? Would the national outcry for doing so would be too great? Or, perhaps Dow hopes to start slow and grow afterwards in its claim? No company can realistically argue that literally hundreds of governments are all simultaneously in breach of “basic due process, transparency, good faith and natural justice”, as Dow argues here.** But if it establishes another test first in one case, maybe it can then be applied to the other measures?

This can only be done if a NAFTA tribunal supports Dow’s argument that Chapter 11 creates a science-based test for the adoption of all new regulations impacting its products. But it does not do so. So Dow is asking that it be read into Chapter 11.

No existing case law under NAFTA or other investment treaties establishes a science-based test for adopting all new regulations, or a requirement for the abandonment of the precautionary principle as a basis for protecting the public welfare.

Moreover, this approach would be stricter than what is applied under international trade law. In an approach coincidentally established in the Asbestos case brought by Canada to the WTO over the ban of asbestos in the European Union, Dow’s current argument that the product is safe if used according to instructions was rejected by the WTO appellate body as the critical legal test. Rather, achieving the desired risk level set by the government—in that case, zero risk of asbestos poisoning—was identified as the appropriate starting point. Dow seeks to reverse this trade-law approach and establish a strict science-based test for governments to meet for all regulations applying to foreign investors. Such a test is simply not expressed in NAFTA or any other investment treaty, and would seriously constrain if not fully deny governments the ability to establish acceptable risk levels to human health and the environment based on the precautionary principle.

Dow goes further. It also seems to be arguing that a democratically elected government actually responding to political demands for the protection of human health and the environment, as witnessed by the hundred plus municipal and other provincial bans is, in itself, illegitimate in the face of this claimed science-based test under NAFTA.

In addition, Dow argues that the measure banning the sale of its products in order to protect human health and the environment constitutes an expropriation. This argument was rejected in almost identical circumstances by the 2005 NAFTA tribunal decision in the Methanex v. United States case. A decision here that contradicts the Methanex case would demonstrate unequivocally the inconsistencies of NAFTA and other similar investment treaties, and the complete inability of governments to predict what it might mean when. The obvious unacceptability of this would necessitate changes to NAFTA and some 2600 other bilateral investment treaties. But in the meantime it would act as a powerful deterrent for the taking of new environmental and human health measures by many governments, which may well be Dow’s ultimate goal in the present case.

Dow’s claim now is for just US$2,000,000. But the stakes are much, much higher than that.